PWR: This high flyer hits speed humps

I last wrote about PWR Holdings (ASX:PWH) over 18 months ago. It has been a bumpy ride since. At the time the share price was $8.60. It rose to $12.98 in February 2024 before halving to $6.10 in November. At the time of writing it is $7.80. So why the roller coaster?

At the time of the previous article, I referred to a screen built by Stockopedia contributor Roland Head that identifies quality stocks that are strong compounders. (Building a screen to find Compounding Quality stocks). PWR met the criteria for this screen at the time. It still does.

Whilst most metrics have declined marginally, it is still a very high quality stock as reflected in the Quality rank of 96 and the sales and profitability metrics continue to compound.

First some background. PWR is a manufacturer of advanced cooling systems. They have traditionally been focussed on motorsport and are the dominant provider of cooling systems for Formula 1 with all teams using their cooling products. They also work with Supercars, touring cars, rally cars, Nascar and Indycar teams all over the world.

Over recent years they have been diversifying their offerings, and now generate about half their revenue outside Motorsport, from supplying cooling solutions to car manufacturers (OEMs), the automotive aftermarket and aerospace and defence.

Source: PWR Holdings, FY2024 Annual Results Presentation, 15/8/24

The share price climbed strongly during the second half of 2023 on the back of record revenue and profit for the FY23 year as revealed in August 2023. This included strong revenue growth across each of the segments running from 12% for the Automotive aftermarket to 48% for Aerospace and defence. Importantly there was a lot of optimism about the outlook and a strong pipeline of OEM projects (building components for production cars) as well as Aerospace and defence projects and Motorsport. They were investing in a UK manufacturing facility to service the European market.

This optimism peaked leading into the release of the FY24 half year results in February 2024, and then slumped as reality failed to keep pace with the very lofty expectations. The headline numbers were still very good with revenue growth of 22% and profit growth of 26%. But digging into the details showed revenue growth in Automotive OEM of only 4%.

At the time, PWH had a very low value score, reflecting the fact that most metrics were at stratospheric levels. The growth expectations were particularly focussed on emerging technologies for OEMs and aerospace and defence, as the historical mainstay of the business, Motorsport, is always going to be a niche application. Once this growth rate was checked a little, expectations were reweighted and valuation multiples declined accordingly.

The next significant announcement was the release of the FY24 full year results in August. Again the headline was record revenue and record profits. Revenue growth tapered back to 18% indicating that growth in the second half was not as strong as the first half. Profit growth was 14% for the full year compared to 26% for the first half. These results fell short of market expectations and set off a further decline in the share price.

The biggest slump occurred in November when the company issued an earnings guidance downgrade. They forecast that net profit for the first half would fall between 62% and 67% when compared to the same period last year. This was driven by a revenue slump in two key segments, OEM and automotive aftermarket. Revenue from OEM is expected to fall 44% and aftermarket is forecast to decline 19%. The OEM slump is due to three niche EV programs not proceeding in FY25 due to volatility in the EV market. Aftermarket is suffering due to broad economic pressure. They are reducing costs to try and alleviate some of the pain.

Management has stated that FY25 is a transition year as they invest in new facilities and equipment in preparation for the expected increase in demand, especially in the aerospace and defence segment. Of course, if that demand failed to materialise the business would be left carrying increased overhead. EPS for FY25 is now forecast to decline 31%.

Most analysts are currently recommending the stock as HOLD or SELL. There was considerable disappointment following the downgrade although the stock rebounded somewhat from its initial decline. This negative sentiment has driven down the Momentum rank.

The Value score has increased but is still very low at 18. Historical and PE ratios are still above 30 and the price to sales ratio is 5.75. The Quality score remains high at 96. PWR remains a high quality business, but it is facing some hurdles. The road to victory is rarely straight. For those who have been waiting for an opportunity to get into this high quality stock, or to top up their holding, now may be that time. That said, there may be more speed bumps and volatility ahead. Whilst the price has certainly declined it is not yet at bargain levels.

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